Global financial watchdog issues warning over China debt

19 Sep 16

China could be heading toward a banking crisis as a huge credit binge puts the world’s second largest economy under pressure, a global financial watchdog has warned.

 

According to the latest quarterly review of the Bank for International Settlements, a forum for the world’s central banks, China’s credit-to-GDP gap is now three times the level it considers dangerous.

The credit-to-GDP measure is considered a key way to gauge stress in the banking sector, with a gap of 10 suggesting a crisis could occur in the next three years.

China’s gap hit 30.1 in the first quarter, according to the report. That’s more than double the second highest level of 12.1 in Canada.

The BIS follows the International Monetary Fund in issuing warnings on China’s debt, which ballooned to 255% of GDP – including government, corporate and household dues – in 2015.

A surge in company borrowing in particular drove the figure up from 220% in 2015. But the government has also relied on credit to give the country’s economy a boost as it struggled to recover from the financial crisis in 2007-08.

The IMF now estimates loans worth $1.3tn could potentially default. The nation’s ailing state-owned enterprises hold a sizeable chunk of the debt mountain.

The BIS report, published yesterday, also warned that the risks to financial market stability are on the rise globally, as rising asset prices don’t appear to accurately reflect underlying risks.

It noted that global financial markets had proven resilient to a number of disruptive developments, like the Brexit vote. But Claudio Borio, head of the BIS monetary and economic department, highlighted “dissonant notes” in markets, with positive signs of strength belied by some tell-tale signs of a gloomier outlook.

“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull, more frustration than joy,” he said. “This explains the nagging question of whether market prices fully reflect the risks ahead.

“Doubts about valuations seem to have taken hold in recent days. Only time will tell.”

 

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